Oct 21, 2008
Executives
Stephen Anderson - Director of Investor Relations J. Don Brock - Chairman and Chief Executive Officer McKamy Hall - Vice President and Chief Financial Officer
Analyst
Arnie Ursaner - CJS Securities Mike Cox - Piper Jaffray Jack Kasprzak - BB&T Rich Wesolowski - Sidoti & Company Chris Weltzer - Robert Baird [David Foundry - Partline Funds]
Operator
Greetings, ladies and gentlemen and welcome to the Astec Industries’ Third Quarter 2008 Results. At this time all participants are in a listen-only mode, a brief question and answer session will follow the formal presentation.
[Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mr.
Steve Anderson, Director of Investor Relations for Astec Industries. Thank you Mr.
Anderson, you may begin.
Stephen Anderson - Director of Investor Relations
Thank you, Rob. Good morning and welcome to the Astec Industries conference call for the third quarter of 2008.
As Rob mentioned, my name is Steve Anderson and I am the Corporate Secretary and Director of Investor Relations for the company. Also on today’s call are Dr.
J. Don Brock, our Chairman and Chief Executive Officer, and McKamy Hall, Vice President and Chief Financial Officer.
In just a moment I will turn the call over to McKamy to summarize our financial results and then to Don to discuss our business environment and business operations. In the way of disclosures I’ll note this morning, that our discussion may contain forward-looking statements that relate to the future performance of the company.
And these statements are intended to qualify for the Safe Harbor liability established by the Private Securities Litigation Reform Act. Any such statements are not guarantees of future performance and are subject to certain risks, uncertainties, assumptions, and other factors, some of which are beyond the company’s control.
Some of those factors that could influence our results are highlighted in today’s financial news release and others are contained in our Annual Report and our quarterly and annual filings with the SEC. As usual, we urge you to familiarize yourself with those factors.
At this point, I’ll turn the call over to McKamy to summarize our financial results.
McKamy Hall - Vice President and Chief Financial Officer
Domestic sales were up 2.7% for the quarter, parts sales were at 49.2 million or an 11.6% increase and composed 23.1% of the quarterly sales in 2008. The breakdown of our sales as far as looking at the pie concept is concerned, Aggregate sales were 38%, asphalt sales are at 23.9% of the pie, Underground is at 17% of the pie and Mobile is 11.8% of the pie with other at 9.3% and those breakdowns are attached to your press release for your convenience.
The consolidated gross profit for the quarter was at 58.8 million up from 48.6 million, a 10.2 million increase or 21.1%. The gross profit percentage increased to 130 basis points for the quarter to 24.8% from 23.5%.
And, we are certainly very pleased to accomplish this with all of the cost increases that we have incurred over this year. SG&A and engineering was at 34.3 million or 14.4% versus 15.5% of sales last year.
Income from operations was at 24.5 million versus 16.6 million that’s an increase of 7.9 million over the prior year. Income by segment is also attached to your press release for your convenience.
The net income is at 16 million that is versus 11.6 million for the quarter last year, that’s an increase of 37.9%. The diluted earnings per share are at $0.71 per share versus $0.51 per share or an increase of 39.2% increase in the earnings per share.
The backlog which is also attached to our release for your convenience is at 255.7 million or up 6.6% and that backlog is broken down for your reference by segment. The balance sheet is very strong our receivables are at 36.4 days versus 37.4 last year.
Our inventory returns are at 3.2 turns versus 3.5 turns last year. We currently owe nothing on our Wachovia credit facility of $100 million.
We are utilizing that for $10.1 million of letters of credit. Our capital expenditures for the quarter are at 5.4 million, we expect those to approach 42 million for the year.
Our depreciation for the quarter is 4.4 million and our depreciation for the year to be around 18.5 million. The cash flow will be attached to the 10-Q filing and we will discuss 2009 expectations during our upcoming year-end conference call.
That concludes my prepared remarks on the financials. Now certainly, I’ll be glad to answer any questions you have later.
Thank you and we appreciate your interest in Astec.
Stephen Anderson - Director of Investor Relations
Thank you, McKamy. Dr.
Don Brock will now discuss Astec’s business operations for the third quarter of 2008. Don?
J. Don Brock - Chairman and Chief Executive Officer
Net income was up 38%, our domestic sales were up 3 while international was up 37%. Hard sales continued to grow and were up 12%.
Our backlog is up to 255 million versus 239 or 7%. We have seen continuous growth in the energy side of our business with American Augers, Astec Underground, Heatec and Peterson.
Looking forward to the fourth quarter and somewhat into ’09 we’ve seen tremendous changes as all of you know in the last few weeks. Oil prices have dropped down to $ 75 a barrel, which reduces cost to our customers.
State are allowing more recycle in their mixes, Steel has softened somewhat, but both steel and asphalt process have not called up yet with the -- I would say they haven’t decreased as much nearly as they have increased. Although most states are short on income we are seeing some beginning to have increases in funding for roads as a stimulus.
A number of states are putting more money into roads. The leadership in Congress is certainly talking about the stimulus package that will have more funding for the infrastructure and that’s a big – would be very important to us particularly in ’09.
Our backlog for the fourth quarter remained strong and most of the company’s we expect to finish the year in the middle to the upper end of our previous guidance of 280 to 295. At this time, there is too many factors that exist to give much light on where’09 will be by the end of the year we should have a better view before we think it will be -- we will know a little more about what's stimulus package has occurred and we will plan on giving you guidance at that time.
With that I’ll stop and be glad to answer any questions.
Operator
Thank you. [Operator Instructions] Our first question today is coming from the line of Arnie Ursaner with CJS Securities.
Please go ahead with your question.
Arnold Ursaner
Hi, good morning. Congratulations on a pretty good quarter.
Can you expand a little bit on your backlog and give us a feel for the percent that is international and your best view of the timing of this backlog, how far half of those that run, does it move pretty well into the beginning part of next season?
J. Don Brock
Arnie, McKamy is looking up the percentage there for you that he can give you in just a second, for us it depends on the business an Asphalt plant we are running out in the next season on oil drilling rigs, on the Heatec heaters particularly for oil and gas is running out into next year, so anything related to the energy business is out there and we are pretty fortunate on Asphalt plants at this period -- in this period of time that we are -- the backlog is still pretty good there, what's the percentage McKamy?
McKamy Hall
Arnie the percentage of backlog from international is consistent with our percentage for the quarter.
Arnold Ursaner
Okay. And my second general…
J. Don Brock
Yes.
McKamy Hall
44%.
Arnold Ursaner
Okay. My second general question relates to margin improvement in the quarter, obviously you have had extremely attractive steel contracts that ran through June, we know that you tried to build up some inventory.
I am trying to get a feel for how much of the margin improvement this quarter might have been impacted by mix, how much might have been impacted by lower cost steel and how we should think about margin for the balance of the year?
J. Don Brock
Arnie I guess I was a little surprised that our margins came in as strong as they did, it's more product mix than it is anything, certainly we had some good orders in the Underground side of the business and their margins were improved somewhat over what they have been in the past. Steel has not, it has affected us, but we did buy a lot of it and that didn’t come in or hadn’t come into our cost as quick as frankly expected.
I think for the -- to answer your questions, I think we probably will be somewhere in the 22 to 24% gross margin in the fourth quarter, that’s the best I can tell at this point. It -- I think I have told to number of people pretty well told you in the last call we thought we would see an erosion of margins, we just haven’t seen as much as we thought, in fact I guess as I said I have been a little surprised that we’ve held it well as we have.
Arnold Ursaner
Two very quick ones for McKamy if I can, could you just repeat your CapEx number for the year, please?
McKamy Hall
43 million.
Arnold Ursaner
Okay. And the final question I have relates to your stock price is down, and I know 123R is impacted by where the stock is, did that benefit the SG&A line this quarter?
J. Don Brock
On the serve?
McKamy Hall
It was…
Arnold Ursaner
Yeah.
McKamy Hall
Let me look -- it was insignificant, they are obvious.
J. Don Brock
No, it did not.
Arnold Ursaner
Okay, thanks very much.
Operator
Thank you. Our next question is coming from the line of Mike Cox, Piper Jaffray.
Please go ahead with your question.
Michael Cox
Hi, good morning guys and congratulations on a very nice quarter.
J. Don Brock
Thank you.
Michael Cox
On the international side of the business, I know that the strength has been in some of the commodity rich country, I was just wondering if you could comment on the order flow now that some of the commodity prices have fallen, any change there is being from the buying behavior from some of these international markets?
J. Don Brock
Michael Cox
Okay, that’s helpful. On the price increase side, I believe in the last conference call, you had noted a couple of additional price increases you had planned in the second half of the year, have those been pushed through or were you getting pushback in customers now that the headline driving steel are going near that direction?
J. Don Brock
We are beginning to get pushback. We’ve had some of them that we put in place going forward, going forward if steel goes back down we will have to make some adjustments.
The customers are very aware of what’s happening there and they are more aggressive on negotiating now due to the current situation.
Michael Cox
Okay, thanks. And my last question on the Mobile Paving business was a little bit lower than we have had expected any re-through there on that business segment?
J. Don Brock
That business segment is experienced probably the most severe downturn in September, clients look down considerably in that area. It always does in September, but its more severe than normal, we have had a lay-off in that division.
Michael Cox
Okay. Thank you very much.
Operator
Thank you. Our next question will be coming from the line of Jack Kasprzak with BB&T.
Please go ahead with your question.
Jack Kasprzak
Thanks. Good morning, Don?
J. Don Brock
Hey Jack?
Jack Kasprzak
I wanted to ask about state finances and state budgets and you mentioned you are seeing some states push through some funding in an effort to stimulate their economies, overall though the state budget picture looks pretty bad and it seems to be deteriorating so versus 4 or 5 years ago when state budget deficits were really problematic for the highway business. What’s different today is it bonding and toll roads and may be you guys taken a little market share with some new products, could you may be just talk about that?
J. Don Brock
Jack, I think in fact Louisiana, Texas, so is Mississippi that area is quite strong, Indiana has got money from that toll road that they sold and it’s a strong market. Florida just released I guess they had to really try to stimulate things, but it is a mixed bag as you said.
California obviously is suffering greatly right now. But there is a mixture around Western Canada is still strong, Australia basically on road programs and a lot of that is privatized over there is quite strong.
But typically, the funding for the roads is on a gas tax but they do have creative ways or reaching to get it, its normally supposed to be dedicated funds and we are seeing some of -- beginning to see that again as we have in the past. But, I guess overall I guess the move forward and moving some of their work forward is the first that we’ve seen a kind of a stimulus and I do think there is more an awareness that infrastructure spending will might create jobs and that’s what’s needed and I see a real, I guess more awareness than that than we’ve seen in the past recessions.
Jack Kasprzak
Right. Okay.
And with regard to, I guess the potential for a federal stimulus obviously depend somewhat on the election perhaps solely on the election, but I mean what you guys have been pretty well in touch with what’s happening in terms of discussions about potential programs on capital. Is there any -- are there any details right now, what kind of plans are floating around out there?
J. Don Brock
I think.
Jack Kasprzak
For dollars?
J. Don Brock
Jack Kasprzak
Right. Okay, great.
Thank you.
J. Don Brock
Thank you, Jack.
Operator
Thank you. [Operator Instructions].
Our next question is coming from the line of Rich Wesolowski with Sidoti & Company. Please go ahead with your question.
Richard Wesolowski
Thanks a lot. Good morning.
J. Don Brock
Hi Rich.
Richard Wesolowski
J. Don Brock
I wish I could tell you that better, I think we are stronger for ‘09 to be flat, if we get the stimulus it probably be flat. The thing that makes it a little hard is the energy side of the business is very strong and growing which tends to temper what we do on the infrastructure side.
Mining seems to still be holding up and we are growing in that area. But without the stimulus I think you are going to see everybody can tell you there is going to be a downturn in the market, there is no question.
It’s just a matter how deep it is. We are fortunately in a good position to take care of that, but I’ll try to write down all of the different scenarios and the pluses and minus, I guess the first one real quickly is that $8 billion for the Highway Trust Fund means we are going to spend a lot federally next year, it’s a matter of the states matching it and with the state funding.
The state revenue as everybody said in general is weaker, that oil price is going down with half their revenues and it will have on the cost side, so that’s probably temporary, the oil price is getting down to $75 a barrel, sure is. The stimulus would certainly make a difference.
Oil drilling as long as we stay in the $70 $80 range I think is okay. The other big question mark, if the dollar stay strong, its going to hurt our international business commodity price is going down, it’s probably going to hurt mining, own buying equipment is a negative, those that are not too many people financing it, and then just the psychological effect of all of this is going on is going to hurt.
On a positive side, you are seeing a back out in price increases we have seen in steel back out some and probably got more to go, and I guess on the positive side our products are very innovative, they are cost reducing type products and we continue to sell a lot of products to increase amount of recycle both milling machines, the sizing equipment or processing equipment and makes with the double barrels which should have made. Most of the plants we have sold has been to upgrade not to necessarily increase volume but to reduce cost.
Rich Wesolowski
Thank you very much, it’s very helpful. Can you vision a scenario given all that where, whether or not we do get a seamless package that the volume suffers a bit, but because the price you have already pushed through steel coming down than your margins, don’t come with existence of the lows that we have seen in the prior cycle?
J. Don Brock
Yeah, I think so, Rich to answer your question, I think a lot of the things you see in the time like this is people will switch more to portable equipment and I think there will -- we are seeing a major retooling to try to do more recycle to reduce their cost and we got better margins in that area. The other thing is we are pushing more in the rebuild to gain grow our parts business, there is better margins in that area, so a lot of these, the product mix is a little better, so I don’t -- I think the other major thing in the last down cycle, we went into it with a 136 million in debt, we had about 25 million in recourse on the financing -- where we financed equipment.
We had about $8 million to $10 million in used inventory. Today we don’t have any debt, we got cash.
We don’t have any recourse. It’s less than $8 million dollars.
And we frankly -- the unusual thing we have frankly a very very little used equipment. So, we are a lot better positioned to not to be paying a lot of interest and a lot of fees right now.
Rich Wesolowski
Okay. And then -- and finally, your comments that those are several other contractors have expressed some confidence in the mining strength that despite they are retreating most of the commodity prices, how much visibility do you guys have into that general area, looking past the projects that have already been started?
J. Don Brock
I think, I guess, our international guys, which primarily in the mining still are reasonability confident in that area. Prices went up, the dollar going high, I was looking at copper there this morning, it was a dollar just not too many years ago or too long ago when the core dollars is back down about 2.60, you know is still way high compared to what it once was.
And same way on steel, it was at $0.40-0.42 a pound the first year and went up to 85, and then were back in low 60s and we feel good about it. But it’s still also awful dollar high as compared in the increases that we have seen.
So, we got a lot of fall back to go – a lot of slippage to go before it gets to the banker forum.
Rich Wesolowski
Thanks a lot.
Operator
Thank you. [Operator Instructions].
Our next is coming from the line of Chris Weltzer with Robert Baird. Please go ahead with your question.
Chris Weltzer
Good morning, gentlemen.
J. Don Brock
Good morning, Chris.
Chris Weltzer
I just had a couple of questions on how your international contracts are structured, if you will. Just want to confirm if there is still, you know, oil price and dollars, and just wondering when your customers typically, actually pay you the cash, is the one that place the order or is it when they, you know, piece of equipment is delivered?
And any visibility you have on whether they hedge that exposure or not?
J. Don Brock
I guess, to the first question is about 90% of that letters of credit or if they are not letters of credit it is in cash before they ship. We have certain countries and certain dealers that dollars are a problem and they send as cash to begin, the dealer send as cash to start building it and before we ship it will get the rest of the cash that does have a little lumpiness because they don’t always get the dollars here when we are ready to ship.
So, that is not as good as a letter of credit. Letter of credits basically are either on board ship or alongside ship, we try to be alongside, they want it on board and I guess your third question was what, Chris?
Chris Weltzer
Yeah, do your customers typically hedge their…?.
J. Don Brock
Yes, typically they do. You know, they hopefully got, I guess, I know that we got plant to just to putting up in South Africa and we hedge that through our South African company and most of them do hedge, yes..
Chris Weltzer
Okay. And when you think back to, I don’t know, may be 1997 of Asian financial crisis, I know international is a lot smaller part of your business than what was, what was your prior experience when they were, you know, short swings in currency exchange rates order gains rates, did you have order cancellations or anything like that?
J. Don Brock
We didn't see as much cancellation, but we saw new order slow down. And that's obviously will happen if, you know, I guess, I see this strengthening of the dollar was just to – everybody run when and what they felt like was the safest of all of the currencies and I see it readjust and that like LIBOR and back to something reasonable before too long, but that remains to be seem that it is important that the dollar drawback move to some reasonable or it will hurt the international sales.
Chris Weltzer
Got you. Okay, and then, I was wondering if you could tell us, you know, an estimate of what average price realization was in the quarter?
J. Don Brock
My guess, it would probably - for the quarter itself?
Chris Weltzer
Yeah.
J. Don Brock
Probably 2%.
Chris Weltzer
Is it a net number, net number raw material cost or is that just gross pricing?
J. Don Brock
I would say - I want to think about that in a minute. I would say that it basically, that's more of a gross and we've been behind on our price increases as compared to the others.
So I would say if you took calls versus net only thing you do look at the gross margin and it was improved, but I’d say generally our calls, our price increases were catching up kind of - we saw the price increases coming up, getting some orders at new prices and our calls going down, this is the difference.
Chris Weltzer
Okay.
J. Don Brock
There is more of a catch-up and getting back where we were beginning of the year.
Chris Weltzer
And then, I think you don’t want to comment specifically on 2009 guidance, but I wondering how you are thinking about CapEx and tax rate in ‘09?
J. Don Brock
We look for CapEx probably to be equal to depreciation in ’09 and that – probably 36%, this actually be at 36.
Chris Weltzer
Alright. That’s very helpful.
Thanks you guys.
J. Don Brock
Okay.
Operator
Thank you. Our final question today will be coming from the line of [David Foundry of Partline Funds].
Please proceed with your question.
David Foundry
Yes, good morning congratulations.
J. Don Brock
Hi, David.
David Foundry
Can you give us a little bit of an update how the capacity expansion is coming for the directional drilling business?
J. Don Brock
Foundations are in, they are going to start shipping of steel next week, so it’s probably going to be February or March, before end of the facility.
David Foundry
And Don is that business still is strong that has been or the outlook is strong than has been?
J. Don Brock
Yes, it is there is still a lot of - we got some unique technology there that I think will hold up David, you know, down market. A lot of offshore drilling and still some of that where people are looking at drilling onshore and turning the drill and going offshore you know.
David Foundry
Yep.
J. Don Brock
So, there is a lot of interesting opportunities there, so we are still pretty optimistic about that.
David Foundry
And then, maybe a question for McKamy, it appears that inventory has increased modestly on a sequential basis, i.e. from June 30th to September 30th and that’s at least has strike me somewhat strange because you are going into a little bit slower time and in the December quarter, is that pre-buying of raw materials or could you may be just comment on that please?
J. Don Brock
I’m going through that one, David, is that, I guess with our cash position we have not been the quite as pressing the gas on inventory. The people who are buying now, if they buy today they own it tomorrow, particularly on mobile equipment.
And so, we have got finished goods inventory that’s a little higher than we would normally have, but it’s again, reactionary buying as much more than planned buying from a customer you don’t have that you are not going to get the deal.
David Foundry
Okay. Great.
Thank you very much.
Operator
Thank you. There are no further questions at this time.
I would like to turn the floor back over to management for closing comments.
J. Don Brock
Okay. Thank you, Rob.
We appreciate your participation on our third quarter conference call and thank you for your interest in Astec. As our news release indicates, today’s conference call has been recorded.
A replay of the conference call will be available through November 4, 2008 and an archive webcast will be available for 90 days. The transcript will be available under the Investor Relation section of the Astec Industries website within the next seven days.
All of that information is contained in the news release that was sent out earlier today. We appreciate your participation.
Thank you.
Operator
Ladies and gentlemen this concludes today’s teleconference. You may disconnect your lines at this time.
Thank you for your participation.